In the third quarter of this year, both the issuance and redemption amounts of derivative-linked securities decreased compared to the previous quarter. As redemptions continued to exceed issuances, the outstanding balance followed a downward trend.
According to the Financial Supervisory Service (FSS) on the 22nd, the issuance amount of derivative-linked securities in the third quarter was 13.2 trillion KRW, down 3.1 trillion KRW from 16.3 trillion KRW in the previous quarter. Redemptions recorded 15 trillion KRW, a decrease of 3.1 trillion KRW from 18.1 trillion KRW in the previous quarter.
The FSS explained, "Due to market uncertainties such as instability in U.S. Treasury yields and the resulting global stock market weakness, investment demand contracted, leading to a reduction in the issuance and redemption of derivative-linked securities. Consequently, the outstanding balance at the end of the third quarter was 94 trillion KRW, down 2.3 trillion KRW from 96.3 trillion KRW in the previous quarter, continuing the downward trend since the end of last year’s 102.2 trillion KRW."
The issuance amount of equity-linked securities (ELS) in the third quarter was 9.9 trillion KRW, down 2.3 trillion KRW (18.6%) from the previous quarter. This decline is attributed mainly to a 2 trillion KRW decrease in the issuance of principal non-guaranteed ELS due to increased global stock market volatility.
Among ELS, index-type ELS, which have underlying assets composed solely of stock indices, accounted for 7.3 trillion KRW, representing 73.9% of the total ELS issuance. This was followed by single-stock-based stock-type ELS and mixed-type ELS based on both stock indices and individual stocks.
By underlying asset, issuance amounts were as follows: S&P 500 at 6.2 trillion KRW, EuroStoxx 50 at 5.7 trillion KRW, Nikkei 225 at 3.2 trillion KRW, KOSPI 200 at 3.1 trillion KRW, and HSCEI at 1.4 trillion KRW. The issuance volume linked to the H index was 1.4 trillion KRW, down 33.8% from 2 trillion KRW in the previous quarter due to concerns over the Chinese economic slowdown, which dampened investment demand for the H index.
ELS issuance including Knock-In options, which involve principal loss zones, amounted to 2.9 trillion KRW, a decrease of 1.2 trillion KRW compared to the same period last year. This decline in demand for Knock-In products was partly due to Knock-In events occurring in H index-linked ELS during the middle of last year.
Regarding ELS underwriting, bank trusts accounted for 5.5 trillion KRW (55.0%), general public offerings for 2.5 trillion KRW (25.2%), and retirement pensions for 1.1 trillion KRW (11.3%).
ELS redemptions totaled 11.6 trillion KRW, down 1.5 trillion KRW (11.9%) from 13.1 trillion KRW in the previous quarter. Early redemptions were 9.7 trillion KRW, similar to the previous quarter. Maturity redemptions were 1.9 trillion KRW, down from 3.6 trillion KRW in the previous quarter. However, this decrease is due to a base effect, as the previous quarter saw increased maturity redemptions of short-term ELS included in retirement pensions.
As of the end of September, the outstanding balance of ELS issuance was 63.9 trillion KRW, down 2.1 trillion KRW (3.1%) from 66 trillion KRW in the previous quarter. The outstanding balance has maintained a downward trend since the end of December last year due to continued net redemptions this year.
The issuance amount of derivative-linked securities (DLS) based on underlying assets other than stocks, such as interest rates, exchange rates, and commodities, was 3.2 trillion KRW, down 900 billion KRW (21.6%). The FSS stated, "This decline is due to reduced investment demand amid increased uncertainty in key underlying assets such as interest rates."
By underlying asset, issuance amounts were 2.4 trillion KRW for interest rates, accounting for the largest share at 75.2%, followed by credit at 500 billion KRW and exchange rates at 200 billion KRW.
DLS redemptions amounted to 3.4 trillion KRW, down 1.6 trillion KRW (31.6%) from 5 trillion KRW in the previous quarter. The outstanding balance of DLS was 30 trillion KRW, similar to the previous quarter.
Of the 94 trillion KRW outstanding balance of derivative-linked securities as of the end of September, the self-hedging amount was 56.2 trillion KRW, a decrease of 500 billion KRW from 56.7 trillion KRW at the end of June. The self-hedging ratio rose by 0.9 percentage points from the previous quarter to 59.8%. This increase is attributed to the steady rise in the proportion of principal-protected ELS and DLS managed through self-hedging.
Regarding asset management, the total valuation of hedge assets was 91.7 trillion KRW, exceeding the liability valuation of 88.2 trillion KRW by 3.5 trillion KRW. Hedge assets were primarily bonds at 78.2 trillion KRW (85.3%), followed by other assets at 9.8 trillion KRW (10.7%) and deposits and cash at 6.1 trillion KRW (6.6%).
The investment returns for ELS and DLS in the third quarter were approximately 6.1% and 4.9% per annum, respectively, rising by 0.2 and 1.5 percentage points from the previous quarter. This increase is analyzed to be due to higher contracted yields and a shortened average investment period resulting from increased issuance of short-term high-interest DLS.
As of the end of September, the outstanding balance of derivative-linked securities with Knock-In events was 6.8 trillion KRW, accounting for 7.2% of the total 94 trillion KRW derivative-linked securities. Most Knock-In events occurred in H index-linked ELS due to the sharp drop in the Hong Kong H index in 2022, totaling 6.2 trillion KRW, with 5.9 trillion KRW maturing in the first half of next year.
An FSS official stated, "As maturities of H index-linked ELS with Knock-In events approach in the first half of next year, we plan to strengthen monitoring of the H index trends and potential investor losses. Regarding the steadily increasing issuance of Nikkei 225-linked ELS, we will enhance monitoring and investor risk notifications due to the possibility of investor losses if volatility expands."
They added, "We also plan to strengthen inspections of potential risk factors such as increased margin calls and market volatility expansion during securities firms’ hedge operations."
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